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In lecture we saw the Cournot competition model for two firms with the same cost function. Now, we are going to consider asymmetric cost functions.

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In lecture we saw the Cournot competition model for two firms with the same cost function. Now, we are going to consider asymmetric cost functions. Assume that demand for a good is given by p = a de (Q4 is quantity demanded), and that there are 2 firms competing in quantities. Both have no fixed costs and a constant marginal cost. Firm 1 has a marginal cost (:1 , and firm 2 has a marginal cost (:2. We have that a>61>02. Find the reaction functions of firms 1 and 2 in this market: how the optimal quantity produced depends on the quantity produced by the other firm. To verify that you have found the correct reaction functions, compute the optimal q] if q2 = 100, a. = 4, b = 0.01, c1 = 2, and c2 = 1. (Note that this is not necessarily an equilibrium.) 9]

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